INTRODUCTION TO

SUPPLY CHAIN MANAGEMENT

The contents of this course materials

Should be used only for internal purposes at FLEXTRONICS

VERSION 0.0
01.02.2014

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INDEX

Learning Objectives

Introduction

Overview of Supply Chain Management

Planning, Materials Requirement Planning

Sourcing

Buying, Purchasing and Procurement

Centralized and Decentralized Purchasing

Direct and Indirect Materials Procurement

11

Non-P.O. Purchase

12

IT Tools used in Purchasing

12

Glossary of Purchasing Terms

14

Learning Check

23

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Learning Objectives
By the end of this Workshop, you should be able to:

Define what is Supply Chain Management

Understand what is Planning & its Importance

Analyze what is Sourcing & Strategic Sourcing

Know difference between Buying, Purchasing & Procurement

Describe Centralized and Decentralized Purchasing systems

Define Direct & Indirect Materials/Services

Explain various IT Tools used by Purchasing Function

Understanding various Purchasing Terms

Introduction
There are four critical stakeholders in any business: Customers, Employees, Owners and Suppliers.
All the four are very important to the business if it wants to sustain growth. No organization can
survive without any of these. Every organization exists between the Customers on one side and the
suppliers on another. While Customers are taken care of by the Marketing Department, it is the
Supply Chain Department that manages the suppliers.
We are all well aware that every commercial organization does business with one primary objective
Increase in Profit! It is obvious that if the organization has to increase shareholders value, it has to
increase revenue and reduce costs or do both. In any manufacturing company, material cost is the
major component of the total cost. It could be as high as 65%. The materials are procured from
external sources. The involvement of external sources increases the risk. One way to improve the
bottom-line is to reduce costs as well as risks. Thus, Supply Chain Department plays a major role in
the effective & efficient functioning of an organization. Supply Chain Management has evolved over
the years with heightened advancement in technology, communication and logistics and has made it
imperative for business establishments to invest and manage their supply chain network effectively.
Effective management of supply chain contributes significantly to organizational success. The
acquisition of materials, services, equipment, facilities etc. in the right quantity and quality at the
right price, time and location from the right source therefore is very critical. The rapidly changing
supply scenario, with cycles of surplus as well as shortages, frequently changing prices, varying leadtimes, fluctuation in availability etc. provides a challenge to all those who are part of Supply Chain.
This course enlists, defines and describes the concepts and tools important for effective
management of supply chain.

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Overview of Supply Chain Management (SCM)

The Glossary of Institute of Supply Management [ISM] defines Supply Chain Management as:
The design and management of seamless, value-added processes across organizational
boundaries to meet the real needs of the end customer.
The Goal of any SCM is to minimize costs and times across the Supply Chain for the benefit of final
customer in the chain. SCM can be defined as a set of three or more organizations linked directly by
one or more of the upstream or downstream flow of products, services, finance and information
from source to a customer. It is the development and integration of people & technological
resources that are critical to successful supply chain integration. Supply Chains are both External and
Internal to a firm. While Customers, Consumers, suppliers, service providers form part of the
external supply chain, internal departments such as Marketing, Planning, Operations, Purchase,
Production, Quality, Stores, Distribution etc. form part of the internal supply chain.
Figure 1: A typical Supply Chain

This is a typical supply chain. Any supply chain will have at least a supplier, a manufacturer / supplier
and a buyer or a consumer. In reality, however, the supply chain could be quite complex.
There could be several suppliers and several customers / consumers. Suppliers may have their own
supply chains. Similarly, customers may in turn have many customers / consumers. The suppliers
who supply directly to the manufacturer is known as Tier 1 suppliers. Suppliers supplying to Tier 1
suppliers are known as Tier 2 suppliers and son on. Similarly, Customers who deal directly with the
manufacturer are known as Tier 1 customers. Tier 2 customers are serviced by Tier 1 customers and
so on.
In any supply chain there are three types of flows Material / Product flow, Money Flow and finally
flow of information. Information flow is always two ways. Information (regarding orders, delivery
schedules etc.) flows from Customers to Manufacturer to Suppliers. Information also flows from
Suppliers (regarding production / orders status, delivery schedules, invoices, payments etc.) to the
Buying Organizations. While the materials generally flow from suppliers to manufacturers to
customers to consumers, money flow from Customers to Manufacturers to Suppliers. Reverse flow
of materials / Money too is possible. However, reverse flow because of rejections, damages, excess
supply, short supply or wrong supply etc. are not welcome. Any such flow costs money to the
organization. At the same time, reverse flow of recycling or reuse is acceptable. For example, empty

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gas cylinders, empty bottles of liquor are usually collected from the send user and sent back to the
original manufacturer for re-filling.
Figure 2: Complex Supply Chain

This is a slightly complex supply chain. This shows manufacturers buying from more than one
supplier and also mirrors the flow of the value added materials or services from manufacturers to
distributers & finally to customers.
Figure 3: Internal Supply Chain

Just like external supply chain, we also have internal supply chain. In a typical internal supply chain,
as the first step the Customers interact with the sales/marketing Team. Sales/marketing share the
demands/forecasts with the Planning Function. Planning function prepares the product plan and
share it with the Production Plant/s as well as with the Purchase Function.
Purchase in turn places the Purchase Orders [POs] on suppliers. Stores gets PO copies. Suppliers
supply the materials. Stores receives the materials and stores. Materials are issued to Production
Plants as & when requisitioned by them. Plants convert these into Finished Goods/Products and

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send these to the warehouse. Warehouses then dispatch the goods to retailers/customers/endusers.
Planning
As exhibited in Figure 3, it is the Sales / marketing Team that generally interacts with the Customers
and collects the orders. The order details are then typically passed on to the Planning Team. Thus,
proper planning of all activities / functions is very critical for the success of a Supply Chain.
Planning is the method of thinking about and putting in order the activities that are essential to
achieve a desired objective. Planning is a proposal, program or process worked out beforehand for
the accomplishment of a goal. Purchase planning is the process used by companies to plan acquiring
activity for a specific period of time. Planning Cycle normally depends on the size or complexity of
the company. A plan could be monthly, quarterly or annual.
Types of Planning:
Depending on the nature of activity and the duration over which this activity has to be carried out,
planning can be categorized as Operational, Tactical and Strategic.
a) Strategic Planning: This provides a high-level overview of the entire business, its vision,
objectives, and value. This kind of planning Influences long-term decisions ranging for a period of
2 to 5 years.
b) Tactical Planning: Tactical Planning describes the tactics the firm plans to use to achieve the
ambitions outlined in the strategic plan and range for a period of up to 1 year.
c) Operational Planning: An operational planning defines the day to day running of the company.
Materials Requirement Planning (MRP)
MRP is a decision-making technique and is used to determine how much material to purchase and
when to purchase it. The Goal of MRP is to meet the needs of the manufacturing plan. It is a material
control system used to keep adequate inventory levels to assure that required materials are
available when needed. MRP is especially suited to manufacturing settings where the demand of
many of the components and subassemblies depend on the requirements of items that face external
demands.
The major objectives of an MRP system are to simultaneously:
Ensure the availability of materials, components, and products for planned production and
for customer delivery,
Maintain the lowest possible level of inventory,
Plan manufacturing activities, delivery schedules, and purchasing activities.
MRP is especially suited to manufacturing settings where the demand of many of the components
and subassemblies depend on the demands of items that face external demands. Demand for end
items are independent. In contrast, demand for components used to manufacture end items depend
on the demands for the end items. The distinctions between independent and dependent demands
are important in classifying inventory items and in developing systems to manage items within each
demand classification. MRP systems were developed to cope better with dependent demand items.
The three major inputs of an MRP system are the master production schedule, the product
Structure records, and the inventory status records. Without these basic inputs the MRP system
cannot function. The demand for end items is scheduled over a number of time periods and

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recorded on a master production schedule (MPS). The master production schedule expresses how
much of each item is wanted and when it is wanted. The MPS is developed from forecasts and firm
customer orders for end items, safety stock requirements, and internal orders. MRP takes the
master schedule for end items and translates it into individual time-phased component
requirements.
The product structure records, also known as bill of material records (BOM), contain information on
every item or assembly required to produce end items. Information on each item, such as part
number, description, quantity per assembly, next higher assembly, lead times, and quantity per end
item, must be available. The inventory status records contain the status of all items in inventory,
including on hand inventory and scheduled receipts. These records must be kept up to date, with
each receipt, disbursement, or withdrawal documented to maintain record integrity. MRP will
determine from the master production schedule and the product structure records the gross
component requirements; the gross component requirements will be reduced by the available
inventory as indicated in the inventory status records.
Sourcing
Once the net quantities to be procured are determined the next obvious step is to acquire the
required materials from a suitable source. Organizations may already have a list of approved
suppliers or they may have to develop a new source. Typically, a buyer checks the approved supplier
first and if no supplier for a particular product or service is available, he / she initiates the source
development activity.

Sourcing is the process of finding suppliers of goods or services. It is the proactive management of a
supply market to ensure access to adequate supplies. Sourcing primarily frames the agreement with
the suppliers but contracts may not happen at this stage. Specific contracts are entered into, usually
at the time of acquiring goods or services.
Sourcing Objectives
The objectives of sourcing is to ensure efficient, appropriate and timely sourcing of goods & services
from the right suppliers. The maintenance of quality, cost, delivery and service levels, a strong
negotiating position and market price awareness throughout the life cycle of goods & services is
essential. Major technology innovations and opportunities should be bought into business
development.

Types of Sourcing:
i. Global Sourcing: When an organization intends to find the most cost efficient supplier
located anywhere in the world.
ii. Low Cost Country Sourcing: A company sources materials from countries with lower labor
and production costs in order to cut operating expenses.
iii. Best Cost Country Sourcing: An Organization chooses a sourcing strategy that is expected to
provide value addition, total cost of ownership (TCO), landed cost analysis and also takes
care of risk management
iv. Strategic Sourcing: The objective is to partner with a few chosen suppliers and to leverage
together the targeted spend to create value additions. This is always a structured approach.
v. Outsourcing: The company contracts or subcontracts non-core activities with an objective to
free up funds, human resources, time and facilities for activities in which it has competitive

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advantage. Organizations then focus on their own core competencies or on what they can
do best.
Buying, Purchasing and Procurement
Buying
Buying is the process of acquiring goods or services in exchange for money or its equivalent. These
Goods or services are normally standard in nature. For Example: Buying a Pen or any other such
stationery item, buying a Chocolate, buying Diesel etc. Buying is a simple activity as we usually try to
acquire standard items or services
Objectives of Buying:
One of the primary objectives of buying process is the facilitation of timely availability of the
materials / services all throughout without compromising on quality of materials / services. Buying
process is in fact a minimized and stabilized length of time from order placement to delivery. This is
mainly because the items or services to be acquired are general or standard in nature. It gives a best
and lowest possible price.
Buying maintains the quality and value of the products of the company. Buying minimizes cash tiedup in Inventory & ensure regular supply of inputs to maintain the flow of outputs. Buyer strengthens
the organization's competitive position. Buying helps to get the best possible quality of all goods,
services, machinery, and equipment at the lowest cost.
Purchasing:
Purchasing is sometimes used with the same meaning as procurement, but usually more narrowly to
define the transaction resulting in the acquisition of a good or service. It is a subset of the wider
procurement process. Purchasing is the process of ordering and receiving goods and services.
Generally, purchasing refers to the process involved in ordering goods such as request, approval
creation of a purchase order [P.O.] record and the receiving of goods.
Objectives of Purchasing
Maintaining the quality and value of the products of the company is the key goal of any purchasing
team. Another measure objective is to minimize cash tied-up in inventory. Purchasing also has to
ensure regular supply of inputs to maintain the flow of outputs. It has to strengthen
the organization's competitive position. Purchasing also has the responsibility to acquire the best
possible quality of all goods, services and machinery or equipment at the lowest cost.
Procurement:
Procurement covers all supplier management activities, starting with the Sourcing and extending to
include the transaction and the optimization of supply. Procurement involves the activities
concerned with establishing basic requirements, sourcing activities such as market research and
supplier evaluation and negotiation of contracts. It may also include the purchasing activities
required to order and receive goods.
Objectives of Procurement
It ensures continuous supply of Materials and minimizes Inventory Investment. It improves Quality &
Supplier Development and gives access to new Technology & Innovation. It ensures Lowest Total
Cost of Ownership. Procurement may be a simple purchasing arrangement with a supplier. It may

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also involve a more complex arrangement with the seller or a group of suppliers that ties required
quantity, quality, and delivery into a production process.
The stages of procurement include information gathering (i.e. who are potential suppliers), supplier
contacts (i.e. gathering information about the potential suppliers, background reviews (i.e. vetting,
screening, checking references of potential suppliers), negotiations (i.e. setting the price and terms),
fulfillment (i.e. delivery and installation), consumption, maintenance, and disposal (i.e. monitoring
the actual delivery and use of the supplies or equipment), and renewal (i.e. reorders and continuing
relationship with the supplier).
For example, direct procurement systems involve the integration of purchasing into a company's
supply-chain management system, delivering the right supplies at the right time. This procurement
method is classified in manufacturing systems as "just-in-time," which minimizes inventory holding
costs and ensures the smooth delivery of supplies needed in the manufacturing process
Centralized and Decentralized Purchasing
How should a Purchasing Organization look like? How big or small or how spread the purchasing
organization should be? Purchasing Organization basically is dependent on many factors, such as
market conditions & types of materials required. When an organization is small, the decision making
happens in a centralized environment. However, when the organization begins to grow and reached
vast geographic area, one may have to think of decentralization. Under Centralized Purchasing, the
purchasing department located at the firms corporate office makes all the purchasing decisions. In a
decentralized Purchasing environment, individual, local purchasing departments, such as plant level,
make their own purchasing decisions.
The purchasing function of any organization is important to the success of that company. By
negotiating with suppliers, a purchasing department can get the best quality items, at the best price,
at the right delivery time. In this way, an organization can ensure that they have the parts available
for their manufacturing process, which in turn allows the production team to produce and deliver
quality items to the customer. The way in which a purchasing department is structured is directly
dependent on the way in which the company operates. Having a purchasing organization structured
in the wrong manner can lead to higher costs for materials and inconsistencies for the production of
finished goods, which can lead to degradation in customer satisfaction.
Purchasing of materials for a small organization is as important as it is for large companies. A small
business operates in a lean manner, and the purchasing process may be simple, but still has to
operate successfully. A small business may have one purchasing professional who has to procure all
the items required for the business. The advantage of a single purchasing professional is that he /
she will usually have a personal relationship with suppliers and can act quickly when issues arise. So
is the case with the medium sized businesses. However, a small team may handle purchases in such
companies. In both the cases, they need to ensure that materials arrive when required and at the
correct price. As businesses grow, the single purchasing professional / small team can easily become
overwhelmed and this can lead to their inability to remain on top of suppliers and deliveries. It is
important for small & medium sized businesses to understand that a growing company needs to
ensure that their purchasing department grows in line with organizational development to ensure
that they maintain the efficiencies.

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Centralized Purchasing
Larger companies often adopt a centralized purchasing structure with all the purchasing staff
reporting to purchasing executive. Under this system, all the departments of a company with a wide
geographical distribution make purchases through a common purchasing organization. The authority
& responsibility for most of the supply-related functions are assigned to a central
organization. Centralized purchasing helps in finding the best deals with local suppliers for a
location. The department is usually located at the Head Office of the Organization. For example, if a
company has five plants across the US, the central purchasing organization will be located in one
location, and purchase items for all five plants.
There are a number of reasons why companies would choose this type of purchasing structure. By
having a single purchasing organization, the company is able to leverage the total spend of the
company when negotiating with suppliers. This lets purchasing department to ascertain the best
price and conditions from suppliers by offering them a commitment to buy in larger volumes.
Centralized purchasing organizations also allow purchasing professionals to specialize in one area.
For example, a purchasing officer could work closely with suppliers who provide a particular
category of product, whereas if they were in a smaller purchasing department they would have to
work with suppliers from many industries.
Companies often like centralized purchasing departments as it gives them a higher degree of control
over the purchasing process. By having the purchasing dispersed across the organization, then there
would be a far greater number of personnel involved in the process and less control of the
purchasing process.
Advantages of Centralized Purchasing
Centralized Purchasing improves greater purchasing specialization and helps in negotiating the best
deals with local suppliers. It avoids order duplication and decides high volume purchase to receive
bulk discounts. It helps in lower transportation and ensures lower inventory management costs.
Under such a system, transactions are usually quite organized and supplier relationships are cordial.
Decentralized Purchasing
Organizations with many locations normally adopt a decentralized purchasing model. This allows
each facility or a group of facilities to carry out their own purchasing. Decentralized Purchasing
refers to purchasing materials by all departments and branches independently to fulfill their needs.
This purchasing model can be successful where the culture of the organization is such that each
location acts as its own profit center, or has a business that is different from other locations. There is
no one purchasing manager who has the responsibility of purchasing materials for all departments
and divisions. The disadvantages of centralized purchasing can be overcome by decentralized
purchasing system.
For companies that have acquired businesses that may not be akin to their core business, the
decentralized purchasing structure would be more appropriate. Local purchasing organizations often
operate similar to the small business model where they have closer ties with local suppliers and are
in a position to respond quickly when required.
Where facilities require the delivery of items at a moments notice, the centralized purchasing model
is not appropriate. If a stock out is imminent, and as a result manufacturing will be halted, then a
local supplier can often deliver the same day, whereas centralized purchasing will probably deal with
a national supplier who will not be able to offer the same response.

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Advantages of Decentralized Purchasing:

Materials can be purchased by each department locally as and when required. All local sources are
effectively used. Materials are purchased in right quantity of right quality for each department
easily. No heavy investment is required initially. Purchase orders can be placed quickly. The
replacement of defective materials takes little time. Better understanding of the local environment,
culture etc.
Hybrid Approach
Many companies have tried to adopt a mix of centralized and decentralized purchasing, where
facilities have the purchasing responsibility for certain critical production items, but the central
purchasing organization have the task of purchasing non-critical items. This is also known as Hybrid
purchasing.
Hybrid approach is a mix of both centralized & decentralized purchasing where authority &
responsibility are shared between the central purchase department and the local purchase
departments. Normally, strategic decision making is centralized and the execution is decentralized.
Establishment of policies, procedures, controls & systems, recruitment & training, auditing of supply
performance etc. are centralized. The rest are decentralized.
Direct and Indirect Materials Purchasing
Direct Materials Purchasing
Direct materials purchasing deals with purchases of materials required to produce an end product.
Typically these are raw materials required in manufacturing or pre-produced materials added as an
assembly to a manufacturing process. Pre-produced materials are generally purchased from a
contractor who produces the materials to specification for the company.
Raw materials are generally processed in house to specification. The direct materials required for a
product vary with the industry as well as purchasing constraints. Some producers may require cash
or credit at the time of sale; others will set terms for repayment. Direct material purchases are a cost
of doing business and are considered liabilities to the balance sheet and once paid result in negative
cash flow.
Thus, Direct Materials include purchase of any material that goes into the end product.
All items such as raw materials, standard and specialized parts, and sub-assemblies required to
assemble or manufacture a complete product are termed as direct materials. Direct material
costs are assignable to a specific product, cost center, or work order. Examples: Steel, Plastic
Granules, Aluminum, wood, Chemicals etc.
Indirect Materials Purchasing
Indirect materials purchasing deals with the purchase of materials that are not directly applicable to
goods produced. Generally indirect materials are consumable items such as paper, pens, and toner
cartridges, items used in manufacture but not part of the finished product, personnel costs and
other related costs. These costs are necessary to the business but can be controlled or minimized in
order to keep the cost of production to a minimum. The person or group responsible for indirect
materials purchases will generally track these purchases during an accounting period and try to
maintain these at a consistent level in proportion to production.
In nutshell, indirect materials include purchase of goods & services that are needed to run the
organization. It comprises of purchase of professional services, utilities, travel, employee benefits,

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office supplies etc. It is also known as Non-Product Related Purchases. Examples: Software,
Hardware, Professional Services, Training.
Figure 3: Illustration of differences between Direct & Indirect Procurement

Non PO Purchase
A non PO purchase is a purchase made without any formal purchase order. Examples include
Advertising, Subscriptions to Journals & Periodicals, payment of License, Business Lunches, Mobile
Service Provider Fees, Travel Tickets etc. In all such cases, no PO is placed, but the service provider
delivers the service and raises an invoice on the buying organization. Payment may happen on the
spot by cash or may occur through an internal voucher either immediately or after a mutually agreed
credit period.
Non-PO system is used for payments that do not originate from a purchase order and when a
supplier does not necessarily want a purchase order or even a P-Card. Typically, payments of certain
amounts (say, $5,000) or greater may have to have prior approval from a Procurement Officer /
Buyer. Non-PO vouchers are created online in certain companies by department users with
appropriate authorization.
Non-PO System provides users a convenient means of making quick payments as an alternative to
Procurement card while providing the same visibility users have come to enjoy with e-Procurement.
This system is used when a Purchase Order [PO] is not necessary (because of low spend value) or
because the supplier does not want/accept any PO and supplies only against the payment of cash.
Non-PO purchase may be permitted as a standard practice or it may occur even during emergency.
IT Tools used in Purchasing
Enterprise Resource Planning (ERP)
ERP software is business process management software that allows an organization to use a system
of integrated applications to manage the business and automate back office functions. ERP software
integrates areas of an operation, including product development, planning, purchase, store,
manufacturing, distribution, sales & marketing etc. Some of the leading Providers of ERP Software
are: SAP, Oracle, Baan and MfgPro.

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Electronic Data Interchange (EDI)

EDI is a standard format for exchanging business data. It is the computer-to-computer exchange of
routine business data between trading partners in standard data formats. Concept is very similar to
the Postal Services, but is automated. Benefits over manual system: Speed, Accuracy, Simplicity &
Security.
Figure 4: EDI V/s Conventional system

E-Sourcing Tools
E-Sourcing is a faster, more transparent and fairer way of facilitating tenders & conducting
negotiations. These tools are founded on a web-based platform. A E-sourcing Tool ensures smooth
and clear transactions.
Some of the Terminologies in e-Sourcing
E-RFI (Electronic Request for Information): Online collection of information used to shortlist
suppliers.
E-RFP (Electronic Request for Proposal): Online collection of proposals used to evaluate and
shortlist business cases.
E-RFQ (Electronic Request for Quotation): Online collection of quotes to either award business or
shortlist suppliers.

E-sourcing is time saving and provides a simple format for submitting data online. An E-Sourcing Tool
facilitates a faster evaluation process and contains clearly defined requirements.
Reverse Auctions [RA]
The Reverse Auctions are always conducted using Internet. A Reverse Auction is a type of auction in
which sellers bid for the prices at which they are willing to sell their goods and services. In a regular
auction, a seller offers an item for sale and buyers place bids until the close of the auction, at which
time the item goes to the highest bidder.
In a Reverse Auction, the buyer puts up a request for a required good or service. Sellers then place
bids for the amount they are willing to be paid for the good or service, and at the end of the auction
the seller with the lowest amount wins.

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Glossary of Purchasing Terms

Accounts Payable
Represents an entity's obligation to pay off a short-term debt to its creditors. The accounts
payable entry is found on a balance sheet under the heading current liabilities. For Example: In
households, accounts payable are ordinarily bills from the electric company, telephone company,
cable television or satellite dish service, newspaper subscription, and other such regular services.
Householders usually track and pay on a monthly basis by hand using cheques, credit cards or
internet banking. In a business, there is usually a much broader range of services in the A/P file,
and accountants or bookkeepers usually use accounting software to track the flow of money into
this liability account when they receive invoices and out of it when they make payments.
Increasingly, large firms are using specialized Accounts Payable automation solutions (commonly
called ePayables) to automate the paper and manual elements of processing an organization's
invoices.
Accounts Receivable
Money owed by customers (individuals or corporations) to another entity in exchange for goods
or services that have been delivered or used, but not yet paid for. For Example: The accounts
receivable department uses the sales ledger, because a sales ledger normally records:

The sales a business has made.

The amount of money received for goods or services.

The amount of money owed at the end of each month varies (debtors).
The accounts receivable team is in charge of receiving funds on behalf of a company and applying
it towards their current pending balances. Collections and cashiering teams are part of the
accounts receivable department. While the collections department seeks the debtor, the
cashiering team applies the monies received.
Approved Supplier List
A list of items and commodities that have approved sources from a list of suppliers. There are
various benefits associated with an effective supplier evaluation process such as mitigation
against poor supplier performance or performance failures. The benefits typically include
sourcing from suppliers that provide high standards of product and service levels whilst offering
sufficient capacity and business stability. Supplier evaluation can help customers and suppliers
identify and remove hidden cost drivers in the supply chain. The process of evaluating
performance can motivate suppliers to improve their performance. Associated challenges with
supplier evaluation include resource and cost commitments in establishing and maintaining a
robust and effective system, challenges with specifying and gathering meaningful and relevant
information, data integrity, scorecards that do not get at the root causes of supplier problems,
and subjective or inconsistent scoring which may result in inaccurate assessment. Another
challenge is making sure that evaluation of current suppliers goes beyond measurement to actual
performance improvement by providing feedback to suppliers on their performance and working
on continuous improvement opportunities. Thus, management commitment to and support of a
supplier evaluation process is essential.
Backlog
Booked (accepted) but unshipped customer orders or interplant orders are called Backlog. The
backlog represents all open orders, not necessarily a past due status. Orders for goods or services
that have not yet been fulfilled. They can be measured in cash terms, or by the number of days of

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normal production it would take to clear them. The level of backlogs is an important indicator of
whether an economy is growing or not. Falling backlogs may be a sign that new orders are
dropping and the old ones are being fulfilled, and that producers are less willing to hold large
stocks or inventories.
Bill of Materials
A structured list of the items used in making a parent assembly that reflects the actual production
process in terms of timing and quantities consumed. It is constructed in combination with the
routing, which describes the individual production steps and rates used.

Blanket Order
A purchase order or customer order combining requirements for a given supplier or customer
and group of items over an agreed-upon time frame. It creates a purchase commitment and
pricing definition for the specified period, which can range from weeks to years based on the
industries or commodities involved.
The blanket often consists of the total agreement terms only; individual delivery dates and
quantities are later generated by the planning system.

Buffer Stock
Extra stock that is maintained to mitigate risk of stock-outs due to uncertainties in supply and
demand. With a new product, safety stock can be utilized as a strategic tool until the company
can judge how accurate their forecast is after the first few years, especially when used with a
material requirements planning worksheet. The less accurate the forecast, the more safety stock
is required. With a material requirements planning (MRP) worksheet a company can judge how
much they will need to produce to meet their forecasted sales demand without relying on safety
stock. However, a common strategy is to try and reduce the level of safety stock to help keep
inventory costs low once the product demand becomes more predictable. This can be extremely
important for companies with a smaller financial cushion or those trying to run on lean
manufacturing, which is aimed towards eliminating waste throughout the production process.
The amount of safety stock an organization chooses to keep on hand can dramatically affect their
business. Too much safety stock can result in high holding costs of inventory. In addition,

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products which are stored for too long a time can spoil, expire, or break during the warehousing
process. Too little safety stock can result in lost sales and, thus, a higher rate of customer
turnover. Finding the right balance between too much and too little safety stock is essential.
Change Order
Used for changes in components, assemblies, or documents such as processes and work
instructions & changes in specifications. ECOs are also called an Engineering Change Note or
Engineering Change Notice (ECN) or just engineering change (EC). A change order is work that is
added to or deleted from the original scope of work of a contract, which alters the original
contract amount and/or completion date. A change order may fork a new project to handle
significant changes to the current project. Change orders are common to most projects, and very
common with large projects. After the original scope (or contract) is formed, complete with the
total price to be paid and the specific work to be completed, a client may decide that the original
plans do not best represent his definition for the finished project. Accordingly, the client will
suggest an alternate approach.
Common causes for change orders to be created are:

The project's work was incorrectly estimated

The customer or project team discovers obstacles or possible efficiencies that require them
to deviate from the original plan

The customer/project team are inefficient or incapable of completing their deliverables

within budget and additional money, time, or resources must be added to the project

During the course of the project, additional features or options are perceived and requested.

The contractor looks for work items to add to the original scope of work at a later time in
order to achieve the lowest possible base bid price, but then add work items and fee back on
once the contractor has been hired for the work. This is an exploitative practice.

Extreme weather conditions cause delays or require additional work to complete

construction.
Current Asset
Represents the short-term resources owned by a company, including cash, accounts receivable,
and inventories.
Current Liability
The debts owed by a company and expected to be paid within a short duration.
e-Commerce
Conducting business and consumer marketing, product information, ordering and payment
functions over the Internet. Product delivery still requires physical capabilities unless the product
or service can be fulfilled using strictly electronic means (as in the download of software code).
Economic Order Quantity
An inventory related equation that determines the optimum order quantity that a company
should hold in its inventory given a set cost of production, demand rate and other variables. This
is done to minimize variable inventory costs.
Electronic Data Interchange
The paperless (electronic) exchange of trading documents, such as purchase orders, shipment
authorizations, advanced shipment.

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 E-procurement
E-Procurement is the business-to-business or business-to-consumer or business-to-government
purchase and sale of supplies, work, and services through the Internet as well as other
information and networking systems, such as electronic data interchange and enterprise resource
planning
Expediting
To raise the priority level on a production or purchase order due to a past due condition or a
change in the requirement date that necessitates compressing the normal lead time.
Inco Terms
International Commercial Terms are a series of three-letter trade terms related to common
contractual sales practices, the Incoterms rules are intended primarily to clearly communicate the
tasks, costs, and risks associated with the transportation and delivery of goods.
Inventory Carrying Cost
The cost of holding goods in stock. Expressed usually as a percentage of the inventory value and
includes cost of capital, warehousing, depreciation, insurance, taxation, obsolescence, and
shrinkage. Also called inventory cost.
Lead Time
The total amount of time between the recognition of a required task, operation or process and its
completion.
Maintenance, Repairs and Operating Items
Items such as maintenance supplies, equipment repair parts, etc. that support the operating
process and are not issued to production orders or included in product standard cost.
Obsolescence
The degradation in the value and usefulness of a resource based on its age, replacement by
newer technology, lack of demand or other factor that may require a partial or total write-off of
its currently-stated value.
Offer
When one party expresses interest to buy or sell an asset from another party. The offering price is
often the highest the buyer will pay to purchase an asset and the lowest that the seller will
accept. The act of making an asset available for sale.
Order Acknowledgement
A communication by a supplier to advise a purchaser that a purchase order has been received. It
usually implies acceptance of the order by the supplier.
Ordering costs
Costs of ordering a new batch of raw materials. These include cost of placing a purchase order,
costs of inspection of received batches, documentation costs, etc.
Outsourcing
The ongoing use of an external third party instead of an internal resource which may include
production of a single operation, a product or an entire line, shipping and order fulfillment,

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product design, network infrastructure support or many other functions. Outsourced functions
are normally outside an organization's core competencies & are done to reduce cost, reduce lead
time, improve quality or achieve some other stated goal.
Preferred Supplier
A supplier who is "preferred" for a list of products companies prefer to buy the most. Suppliers
sometimes offer extra commissions, but also often make special offers/agreements available.
Procurement Card
A purchasing card (also abbreviated as P Card or P-Card) is a form of company charge card that
allows goods and services to be procured without using a traditional purchasing process.
Purchase Order
The contractual agreement with a supplier of goods or services that specifies payment terms,
delivery dates, item identification, quantities, freight terms and all other obligations and
conditions. The order may specify multiple items and delivery dates, but is always generated for a
single supplier.

Pull In
Pulling in delivery dates in a Purchase order based on sudden requirement for material
Push Out
Postponing the delivery date in a purchase order if there is no urgent need for material or if
production is not scheduled immediately

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 Quotation
A specific determination of the cost, timing, description and terms associated with a projected
good or service to be provided by a supplier to a customer. Valid for a certain timeframe, or up to
a specified quantity limit, and modified based on changes in the item or service
Request For Proposal
A document used to detail proposed goods or services requirements and invites responses and
bids from prospective suppliers.
Request For Quotation Show a Template
Often used synonymously with RFP, but may involve a final price quotation request for a precise
set of requirements.
Requisition
A paper or electronic document that requests delivery of materials or services and is normally
initiated by the user department. It usually includes requested dates and quantities, but may
leave the determination of pricing and supplier sourcing to a purchasing agent. MRP generations
often treat accepted requisitions as a scheduled receipt in the same manner as a purchase order.
Scope of Work
The division of work to be performed under a contract or subcontract in the completion of a
project, typically broken out into specific tasks with deadlines.
Spend Analysis
Spend analysis is the process of collecting, cleansing, classifying and analyzing expenditure data
with the purpose of reducing procurement costs, improving efficiency and monitoring
compliance.
Statement of Work
A statement of work (SOW) is a formal document that captures and defines the work activities,
deliverables, and timeline a supplier must execute in performance of specified work for a client.
The SOW usually includes detailed requirements and pricing, with standard regulatory and
governance terms and conditions.
Supplier Development
Supplier development is the process of working with certain suppliers on a one-to-one basis to
improve their performance for the benefit of the buying organization.
Supplier Evaluation
Supplier evaluation is also a process applied to potential & current suppliers in order to measure
and monitor their performance for the purposes of reducing costs, mitigating risk and driving
continuous improvement.
Supplier Rationalization
Supplier rationalization is a systematic ordering of the supplier base. It is the process used by
organizations to discern the optimum number of suppliers needed to fulfill their business
objectives.

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 Volume Discount
A financial incentive for individuals or businesses that purchase goods in multiple units or in large
quantities. The seller or manufacturer rewards those buying in bulk by providing a reduced price
for each good or group of goods.
Warranty
A written guarantee, issued to the purchaser of an article by its manufacturer, promising to repair
or replace it if necessary within a specified period of time.
Return To Vendor (i.e., Supplier)
Materials may be returned to suppliers for repair, credit, refund, replacement or exchange. Any
items damaged, or lost in transit becomes the responsibility of the party retaining ownership
during transit.
Returns must be documented. If the incorrect material delivery is due to a department ordering
error, the supplier is under no obligation to accept the return.
Return Merchandize Authorization
A return merchandise authorization (RMA) or return goods authorization (RGA) is part of the
process of returning - to receive a refund / replacement / repair. The purchaser of the product
must have prior approval of the supplier to return the product. Returns are expensive &
inconvenient to both the parties. The RMA/RGA process is also often used, particularly in the
electronics industry, as a condition of service agreements.
Negative Purchase Order
A PO with a negative quantity and a Return order, both are the types of Supplier return process
i.e return a product to a Supplier. Return order needs Purchase Type as Returned Order with a
RMA (Return Merchandise Authorization) number. PO with a negative quantity does not need
RMA no. and also does not need the Purchase type as Returned order. In return order, RMA
number is mandatory and not applicable on normal PO with negative lines.
Manufacturer Part Number (MPN)
A part number (often abbreviated PN, part no., or part #) is an identifier of a particular part
design used in a particular industry. Its purpose is to simplify referencing to that part. It
unambiguously identifies a part design within a single corporation, and sometimes across several
corporations. MPN identifies the part as belonging to and originating from that one
manufacturer. If parts come from different manufacturers, they will have different MPNs,
identifying the manufacturer.
Scrap
Scrap consists of recyclable materials left over from product manufacturing and consumption,
such as parts of vehicles, building supplies, and surplus materials. Unlike waste, scrap can have
significant monetary value.
Purchase Requisition
Document generated by a user department or storeroom-personnel to notify the Purchase
Department of items it needs to order, their quantity, and the timeframe. It may also contain
the authorization to proceed with the purchase. Also called purchase request or requisition.

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 Demand
The amount of a particular good or service that a consumer will want to purchase at a given price.
Demand for a good or service is determined by many different factors other than price, such as
the price of substitute goods and complementary goods.
Demand may even be completely unrelated to price, or nearly infinite at a given price. Along
with supply, demand is one of the two key determinants of the market price.
Electronic Data Interchange (EDI)
Electronic data interchange (EDI) is a document standard which when implemented acts as a
common interface between two or more computer applications in terms of understanding the
document transmitted. It is commonly used by big companies for e-commerce purposes, such as
sending orders to warehouses or tracking their order. It is more than mere e-mail; for instance,
organizations might replace bills of lading and even cheques with appropriate EDI messages.
Minimum Order Quantity
The smallest amount or number of a product that a company will supply: For example, the
minimum order quantity for PCB xxxx is 500 pieces. A minimum order quantity (MOQ) is the
minimum order size accepted by a supplier. Generally, based on the minimum order the supplier
needs in order for the transaction to be profitable for them. Sometimes they may accept smaller
orders for a higher price per unit.
Past Due Order
A line item on an open customer order that has an original scheduled ship date that is earlier than
the current date. Also known as late order or order backlog.
Purchase Order Cancellation
Purchase Order may have to be cancelled when suppliers do not meet the delivery date specified
on the Purchase Order, when requirements of the Purchase Order having not been properly
performed and when Goods or services provided do not conform to the specifications of the
Purchase Order.
Turn Around Time
Time it takes to get a job done and deliver the output, once the job is submitted for processing.
Turnaround may be as simple as unloading and reloading a delivery truck before sending it out
again, or as complex as completing a merge/purge of several rented lists, getting a product into
the buyer's hands once it is ordered, or receiving approval on a proof that has been submitted to
the print buyer.
In most cases, a short turnaround time is economically advantageous, making the most efficient
use of time and materials.

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 Invoice
A detailed list of goods shipped or services rendered, with an account of all costs; an itemized bill.

Invoice Blocking
An invoice becomes blocked for payment when a PO related invoice is entered
before the goods receipt or if the invoice is out of tolerance for quantity or price.
Packing Slip
A document that includes details about the contents of a package. Intended to let transport
agencies, government authorities, and customers know the contents of the package.
These details help each of these parties handle the package accordingly. Is created by the seller
and sent along with the goods to their destination.
Contents of a packing list
Contents of a package, details about the quantity, description, and weight of these contents.
Content pricing is not included.
*****

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Learning Check
In this Workshop, we:

Defined Supply Chain Management

Recognized what is planning and also its importance

Explained Sourcing, Global Sourcing, Low Cost Country Sourcing, Strategic Sourcing etc.

Understood the difference between Buying, Purchasing & Procurement and their
objectives

Described Centralized & Decentralized purchasing systems

Illustrated how direct & indirect materials / services are generally purchased

Explained the various IT Tools used in Purchasing

Understood the different terms used in Purchasing

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